Having money isn’t always about what you earn, it’s about what you keep. Living below your means is a method for accelerating the process for reaching your financial goals and have financial stability. Here are some methods for living below your means.
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Have a Financial Plan
To live below your means you need to have clear expectations for how much you will spend. The best place to start is by building a budget. Once you have a budget in place you should also have money set aside for a rainy day. Depending on your circumstances you should have an emergency fund that covers 3 – 9 months’ worth of expenses.
One important piece of the puzzle when budgeting is to remember to pay yourself first. First you need to know what your objective is. Remember, if you don’t have a plan, you plan to fail!
What are your goals in the next 5 or 10 years? Do these goals include saving for a home, a family, education, vacations, investing, or retirement? All of these goals have different metrics that can be reached over time with the right plan.
If you have your money in the stock market it also pays off to have an investing plan. This will help you stay on track by not making emotional decisions with your investments.
Increase your income but not your lifestyle
The easiest way to live within your means is to not increase your lifestyle once your income starts to rise. This is usually where people run into issues when it comes to building wealth. Every time they get a promotion they upgrade their lifestyle. If you are able to keep your lifestyle at a fixed cost while saving and investing the rest, it will make a huge difference over time. Every raise or increase in income can be put to work in savings or investments. If the funds are automatically taken out of your account you don’t have to even think about it. Example of accounts where money can be put to work are: retirement accounts, brokerage accounts, high-yield savings accounts, etc.). The more you allow your money work for you, the easier it will be to expand your means in the long term.
Decrease your spending
Sacrifices can be made in the short term and the long term to live comfortably below your means.
Making temporary sacrifices in the short term can allow you to save large amounts of money. This money can help create a snowball effect to achieving your goals. An examples of a short term sacrifice is reducing or eliminating vacations until you reach a certain goal. Remember that when you are younger, you may have the flexibility to take more risks and sacrifices with your budget than when you are older. You may not have children, medical expenses, a mortgage, and other major responsibilities yet. Saving and putting the work in early can make a huge difference in the long run.
Long-term sacrifices consists of cutting expenses that you can live without. Possible long term sacrifices are reducing the amount of meals out in a month or deciding to downsize your living arrangement. Many people choose to live a minimalist lifestyle for the simplicity and the savings benefits. The lower your monthly expenses are, the easier it will be to reach financial independence.
Understand what makes you happy
Evaluate the things in life that you hold dear. If you can’t justify having certain things in your life, it may make sense to eliminate them. When deciding to make sacrifices to achieve your goals, it is important to understand what you can be happy with. Making sacrifices and creating goals requires you to set priorities on what is important right now while understanding what will be important in the future. Don’t make sacrifices that impact well being. Do things that make you happy that can be done on a budget.
Try to avoid consumer debt
If possible, avoid accumulating consumer debt. Having large amounts of debt can make it difficult to achieve your goals. The less high interest debt you have, the easier it will be to save and invest for the future. This means sticking to a budget and not overdoing it with discretionary expenses. There are tons of psychological studies that explain why people choose to spend above their means. If we know what our impulses are, we can manage and control them.
A very common debt that people overindulge in is buying a car that is too expensive for their budget. If we have learned anything during this pandemic, it’s that car dealerships make their money by creating loans. A car is simply a vehicle for creating new loans. This is why car dealerships are so disappointed when a buyer pays for a car in cash.
Ultimately, when buying a car, the fixed costs should be a reasonable amount in relation to your budget. Many people buy their dream car once they start making good money but then later realize how much of a liability it can be. The total cost of a car is larger than what many people originally account for. Once you total up insurance, gas, maintenance, taxes and car payments, the cost starts to add up. When making large purchases, be aware of all of the upfront and long-term costs in the beginning so that you don’t end up in a bind.
Pay off student loans fast by paying more than the minimum
Since there are so many student loan repayment options, selecting the right option for your situation can be an overwhelming process. Since the plans tend to be flexible, it is very easy to overlook how much interest is paid when only making the minimum payment. When I graduated from college, I selected the Graduated Repayment Plan. I chose this plan because I had no idea how much money I would be making and I wanted to make sure I could afford to pay my loans. This plan assumes that you will begin making more money the longer you work so the monthly payment amount increases every 2 years. Once I started making my payments, I realized that my minimum payment was equivalent to the interest I owed each month. If I hadn’t looked into this for myself and started making excess payments, I would not have started making any progress in reducing my debt obligation for two years! I have a post on how to actively manage your student loans to save money.
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Create passive streams of income
Having passive income streams allows you to expand your means over time. If it is not feasible to increase your main source of income, try having your money work for you by generating consistent passive income. The great thing about passive income is that it requires upfront work in the beginning but then you are able to reap the benefits of your labor. Passive income can be used to create a nest egg for the long-term, or it can supplement your current income.
Living within your means is a life skill that can help you build wealth over your lifetime. No matter how much money you make, if you aren’t able to live within your means, you will always need to increase your income to maintain your lifestyle.
Are you looking to build your professional network to find new opportunities? Check out my post on creating a LinkedIn profile and building connections.
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What methods do you use to live below your means?
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
